Monthly Archives: July 2016

For much of the year, beginning in January when the stock market had its worst start of a new year in history, we’ve been asked periodically why our portfolios haven’t been materially more defensive. The question has arisen at other times during the year, such as in aftermath of the UK’s “Brexit” vote, an event that temporarily took the market lower because of fear and uncertainty, but did not change the fundamentals. Now, some are wondering if the economic expansion could be getting long in the tooth.

Add to that the cable news chorus that, from time to time, warns investors that the next bear market is right around the corner (cable news pundits have called about five of the last two recessions).

And yet, here we sit, at or near all-time highs in equities.

For us, it’s a pretty straightforward proposition, thanks to the Astor Economic Index®, our proprietary, data-driven guidepost that allows us to determine, in real time, the direction and strength of the U.S. economy. Thanks to this “now-cast,” we are able to aggregate a variety of data into a single value, which we compare to historical levels and historical averages to determine whether we believe the economy is expanding or contracting and to what degree of strength or weakness.

The AEI is our answer to “the” question we believe is foremost on investors’ minds: What is the current state of the economy and its implications for exposure to risk assets?

As a robust aggregation of what is occurring across the $17 trillion U.S. economy, the AEI is our guide for determining risk asset allocation. Research shows that when the economy is growing, it is productive to hold risk assets (i.e. equities); when the economy is contracting, risk assets should be reduced. This is not prognostication—it’s now-casting, to capture the current state of the economy.

Source: Astor Calculations

Since the economy turned the corner after the last recession—whether measured by the National Bureau of Economic Research (NBER), the Astor Economic Index®, or even your own “gut feel” of when things got better after the 2008-2009 financial crisis—the economy has been growing. As the AEI chart (above) illustrates, there have been points during this recovery when economic growth has been faster or slower. But at no time since the recovery has the AEI suggested that the expected return on risk assets was negative.

Not that there haven’t been some times of concern, when caution seemed prudent, such as the 2011 debt ceiling crisis and fears of a U.S. government default. But once those clouds cleared, downturns proved temporary and the financial news media’s repeated calls for a bear market were only head fakes.

The caveat, of course, is that some times are riskier than others; from time to time some assets and sectors do better than others. For example, earlier this year a slower pace of economic growth (but growth, nonetheless) suggested that we reduce beta somewhat in our portfolios, which we did.

Nonetheless, as the AEI chart shows from 2012 to the present, generally speaking risk exposure to risk assets (equities) has paid off, with the exception of a quarter or two. Our data-driven, fundamental approach, however, doesn’t attempt to capture short-term moves, quarter to quarter. As we tell clients, our goal is to generate solid, long-term returns, but our discipline is focused mainly on mitigating risk and protecting the downside. We attempt to give investors what we call “a smoother ride” through the cycles. Interestingly, this theme was featured in a recent Wall Street Journal’s report on the desire of investors for “peace of mind” by controlling volatility. When investors know what they want they can pursue their investment goals accordingly. A fundamentally-driven, macroeconomics-based approach, we believe, is the key to staying disciplined in the pursuit of those investment objectives.

For now, the AEI tells us to stay the course with exposure to risk assets. One day, presumably, that will change—and when it does, we will act accordingly.

All information contained herein is for informational purposes only. This is not a solicitation to offer investment advice or services in any state where to do so would be unlawful. Analysis and research are provided for informational purposes only, not for trading or investing purposes. All opinions expressed are as of the date of publication and subject to change. Astor and its affiliates are not liable for the accuracy, usefulness or availability of any such information or liable for any trading or investing based on such information.

The Astor Economic Index® is a proprietary index created by Astor Investment Management LLC. It represents an aggregation of various economic data points: including output and employment indicators. The Astor Economic Index® is designed to track the varying levels of growth within the U.S. economy by analyzing current trends against historical data. The Astor Economic Index® is not an investable product. When investing, there are multiple factors to consider. The Astor Economic Index® should not be used as the sole determining factor for your investment decisions. The Index is based on retroactive data points and may be subject to hindsight bias. There is no guarantee the Index will produce the same results in the future. The Astor Economic Index® is a tool created and used by Astor. All conclusions are those of Astor and are subject to change.

New orders for Durable goods decreased 4% in June making this the biggest drop since August 2014. The core measure of new orders for non-defense capital goods excluding aircrafts is up 0.2% in June but still down -3.7% YoY.

While the overall new orders decline of 4% looks bad, we believe it is not as meaningful as a measure of manufacturing activity. The reported decline is attributable to a -59% change in commercial aircraft orders.

The core capital goods number is used by economists as sign of business investment activity. It has been negative since Dec 2015 but the pace of decline has been slowing.

This measure tracks private fixed non-residential investment, a measure of business investment which declined for two consecutive quarters (Q4 2015 & Q1 2016) for the first time since 2009.

It can be seen as leading indicator, but revisions & volatility may make it less reliable.

These numbers don’t fully take into account the uncertainty and the strengthening dollar post-Brexit and we expect next month’s release to reflect further deterioration in business investment activity.

Astor’s View

Since 2014, there has been ongoing weakness in manufacturing sector and US PMIs, led by the domestic energy sector & a strong US $. We have been seeing gradual recovery in 2016- the July Markit Flash Manufacturing PMI released last week was highest since October 2015. But, we expect headwinds to remain from political & global markets uncertainty.

Data Source: Bloomberg

All information contained herein is for informational purposes only. This is not a solicitation to offer investment advice or services in any state where to do so would be unlawful. Analysis and research are provided for informational purposes only, not for trading or investing purposes. All opinions expressed are as of the date of publication and subject to change. Astor and its affiliates are not liable for the accuracy, usefulness or availability of any such information or liable for any trading or investing based on such information.

The economic news improved somewhat from my last update. The labor market looks more solid than it did a month ago and there are some signs the manufacturing sector may have found it footing. I believe the Brexit vote will likely have only a modest direct impact on the US, but will make all observers less confident of their predictions for global growth. This summer, the fed may try to convince the market that it will hike again in September, but my guess is that the December will be the earliest.

Our latest reading for the Astor Economic Index® (“AEI”) is higher than last month, and at near the highest level posted this year. I still see the US as currently growing above average. The AEI is a proprietary index that evaluates selected employment and output trends in an effort to gauge the current pace of US economic growth.

Source: Astor calculations

The labor market has been doing its noisy best to upset the stomachs of economists. June’s payroll number showed a solid recovery from the weak numbers posted for April and May. That being said, smoothing the series somewhat by looking at year over year percentage change shows that the US economy is still adding jobs but at a somewhat slower pace than has prevailed over the last few years.

The nowcasts produced by the Federal Reserve banks of Atlanta and New York are both still showing stronger growth in the second quarter than the first. The Atlanta Fed is currently estimating 2.3 SAAR and the New York Fed 2.1. These are both slightly weaker than last month’s estimate. Both have been updated since the employment report.

The biggest economic surprise of the year has been the vote for the UK to leave the European Union. At Astor, we were pleased to provide rapid reaction to this event on our blog on the morning and afternoon of the vote. I think our analysis holds up well: see CEO Rob Stein’s take here and mine here. As some of the dust has settled, short term implications for the UK economy are seen as dramatic by many economists. For example, the panel of economists surveyed by Consensus Economics is now forecasting 1.1% growth in 2017, down from a 2.1% forecast last month. Reductions for growth in the Eurozone are smaller. Consensus Economics now forecasts 1.4% in 2017 down from 1.6%. These same economists are not currently seeing significant direct effects on the US or the rest of the world. The swift resolution of the UK leadership contest (with a new Prime Minister this week as opposed to the September time table originally announced) may offer grounds for optimism that a deal may cut short the period of uncertainty.

I see Brexit uncertainly leading to reduced investment by both firms and households as the primary channel affecting UK GDP. To the to the extent that the uncertainly will have sustained spillovers into the financial markets it could have indirect effects on the US. For example, the dollar initially rallied after the vote, but is now about the level that obtained in early June. Should the dollar appreciate against our trading partners, it would be expected to make exporting more difficult. In my opinion, the largest effect, however, seems to be in government bond yields. US ten year yields have moved down 25 basis points to a yield of around 1.50% as this note is being written. While, some of this may be safe haven demand that one can hope will be reversed as a path forward emerges, there are few of the other typical signs of investor fear. Investors willing to take 1.5% for 10 years may be foreseeing long spell of a worrying lack of attractive opportunities for investment in the US and abroad.

When last we heard from the fed, their rate-raising plans were put on hold by the poor payroll numbers in April and May. Does the decent report for June portend another hiking scare? I think it is too soon to tell. My interpretation of their speeches is that for the fed to raise rates they need to be convinced that the labor market is at full employment and that inflation will return to target in the medium term. The last report has some points for both sides. If the decision was finely balanced before, then in my opinion the Brexit vote strengthened the doves’ position. Neither inflation nor the labor market are likely to see a boost because of it, and I imagine the decline in yields has the fed’s attention. My guess is that a few hawks will try to make the case for a hike over the summer but that the fed will not hike before December. For what it’s worth, the most common interpretation of rates implied by fed fund futures market sees only a small chance of a hike before the end of the year, as opposed to the situation in January when more than one additional hike was priced in. A sustained return to the relatively robust labor market we saw over 2014-2015 would increase the likelihood of a hike.

Overall, I am relieved the labor market seems to have bounced back from a weak April and May, but I will feel better about the economy if we see this strength confirmed over the next few months.

All information contained herein is for informational purposes only. This is not a solicitation to offer investment advice or services in any state where to do so would be unlawful. Analysis and research are provided for informational purposes only, not for trading or investing purposes. All opinions expressed are as of the date of publication and subject to change. Astor and its affiliates are not liable for the accuracy, usefulness or availability of any such information or liable for any trading or investing based on such information.

“The Astor Economic Index® is a proprietary index created by Astor Investment Management LLC. It represents an aggregation of various economic data points: including output and employment indicators. The Astor Economic Index® is designed to track the varying levels of growth within the U.S. economy by analyzing current trends against historical data. The Astor Economic Index® is not an investable product. When investing, there are multiple factors to consider. The Astor Economic Index® should not be used as the sole determining factor for your investment decisions. The Index is based on retroactive data points and may be subject to hindsight bias. There is no guarantee the Index will produce the same results in the future. The Astor Economic Index® is a tool created and used by Astor. All conclusions are those of Astor and are subject to change.”

If you were to look only at where the market closed out June, with the S&P (SPX) at just under 2100 (2098.87 SPX) and compare that to month-end for May (2096.96), you’d see that little had changed. Quarter-to-quarter, the rise from the Q1 close of roughly 2060 to the Q2-end is nearly a 2% gain. Q1 followed a similar pattern ending the quarter within 1% of where it began.

What that view fails to acknowledge, of course, is another quick, market-rattling event—this one known as “Brexit,” which caused a spike in fear and uncertainty again. Volatility increased and the major averages were sent swinging in 5-10% ranges. At its lows, SPX traded below 2000, declining nearly 5% in a matter of days.

But, here we are again, right back to previous levels (sound familiar?). As I noted in my previous post about Brexit being an event, the UK’s departure from the EU had little short-term impact on the current state of the economy, and markets will eventually reflect that reality.

Speaking of the U.S. economy, there have been some hopeful signs. The Chicago Business Barometer (also known as the Chicago Purchasing Manager Index) rose 7.5 points to 56.8 in June, the highest level since January 2015. The rise was attributed to strong gains in new orders and production. Further, the rebound in June offset the previous two months of weakness. The Chicago Barometer average for Q2 was 52.2, virtually unchanged from 52.3 in Q1.

Also widely anticipated was the June ISM Manufacturing Survey (released July 1), which came in at 53.2—beating estimates and posting a fourth consecutive month of growth.

That’s why, market “events” aside, Astor focuses intently on the economic fundamentals—especially through the lens of our proprietary Astor Economic Index® (AEI). Based on our reading of the current state of the economy we allocate assets accordingly. Although the AEI has declined over the past several months and our beta (exposure to risk assets) was adjusted accordingly, the Brexit “event” and aftermath of the past week did not change our overall view of the economy, or our outlook for the equity markets over the next few quarters.

To be clear, if fundamentals change we will adjust our asset allocation and our weighting of risk assets. But as of this writing, fundamentals are about the same as they were a few months ago. In fact, Q1 GDP was revised higher to 1.1%, compared to the initial reading of 0.5% and the second estimate of 0.8%. (Whether GDP has accelerated from the economy’s slowed pace of earlier this year will put the spotlight on the Q2 advance report, due to be released July 29.)

The conclusion we draw from all this further supports our thesis from earlier in the year: we are in a low-return environment. Low-risk assets such as 10-year treasuries are yielding less than 2%, and risk assets such as equities are on track for single-digit returns with double-digit volatility.

Given that outlook, we believe our portfolios are positioned to capitalize on this environment, while we remain prepared to make adjustments to become defensive should risks increase. At the same time, if economic fundamentals improve and risk assets appear likely to generate greater returns for the same risk, we will adjust to that accordingly as well.

Through whatever “events” might rattle the market from time to time, we continue to keep our eye on what really matters—the economy.

Rob Stein is the CEO of Astor Investment Management LLC, a registered investment advisor that provides advisory services to approximately $1.9 billion (as of March 2016) in client assets across various product channels, including separately managed accounts, mutual funds, and model delivery arrangements. Astor’s investment philosophy is based on the belief that diligent analysis of economic data can provide valuable signals for longer-term financial market allocations.

All information contained herein is for informational purposes only. This is not a solicitation to offer investment advice or services in any state where to do so would be unlawful. Analysis and research are provided for informational purposes only, not for trading or investing purposes. All opinions expressed are as of the date of publication and subject to change. Astor and its affiliates are not liable for the accuracy, usefulness or availability of any such information or liable for any trading or investing based on such information.

The Astor Economic Index® is a proprietary index created by Astor Investment Management LLC. It represents an aggregation of various economic data points: including output and employment indicators. The Astor Economic Index® is designed to track the varying levels of growth within the U.S. economy by analyzing current trends against historical data. The Astor Economic Index® is not an investable product. When investing, there are multiple factors to consider. The Astor Economic Index® should not be used as the sole determining factor for your investment decisions. The Index is based on retroactive data points and may be subject to hindsight bias. There is no guarantee the Index will produce the same results in the future. The Astor Economic Index® is a tool created and used by Astor. All conclusions are those of Astor and are subject to change.

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All information contained herein is for informational purposes only. This is not a solicitation to offer investment advice or services in any state where to do so would be unlawful. Analysis and research are provided for informational purposes only, not for trading or investing purposes. All opinions expressed are as of the date of publication and subject to change. Astor and its affiliates are not liable for the accuracy, usefulness or availability of any such information or liable for any trading or investing based on such information.